Archive for the ‘Johnson and Johnson’ Category

When I published “The Facade of FCPA Enforcement” in 2010 (see here) the trend of FCPA-inspired tag-a-long private civil suits was in its early stages. Thus, the section of my article – why the facade of FCPA enforcement matters – did not include discussion of such suits.

Now that the trend is clear, add FCPA-inspired private civil suits to the list of reasons why the facade of FCPA enforcement matters.

The game is very predictable. In the days and weeks following an FCPA enforcement action, or even a company disclosing or otherwise being the subject of FCPA scrutiny, the suits and/or “investigations” by plaintiffs firm will start to mount

In this prior post, I asked whether FCPA-inspired civil suits have a purpose or a parasitic. I stated that when a company’s FCPA violations are found to be condoned or encouraged by the board or executive officers, such plaintiff causes of action would seem to be warranted. But these situations are rare in FCPA enforcement actions. This prior post detailed June 2011 Congressional testimony on behalf of the U.S. Chamber Institute for Legal Reform that touched upon FCPA-civil litigation and I generally agree with the criticisms made of this “piggyback-litigation phenomenon.”

Several prior posts (here and here) profile how such derivative claims seldom, if ever, get past the motion to dismiss stage. Yet, several companies make the business judgment to settle such claims for what amounts to nuisance value for the company, but which represents a handsome pay day for plaintiff’s counsel for doing and accomplishing next to nothing.

In July, Halliburton announced here that a Texas state court issued an order preliminarily approving the proposed settlement of a derivative claim concerning a variety of misconduct, including Bonny Island, Nigeria conduct giving rise to the previous FCPA enforcement action against Halliburton and its related entities.

Pursuant to the proposed settlement, within 90 days of a final settlement date, Halliburton’s board agreed to implement various corporate governance and internal control revisions. The items most related to FCPA compliance should not be hard to accomplish because pursuant to the 2009 FCPA DOJ/SEC settlement, Halliburton already was under an existing obligation, including through engagement of a compliance monitor, to implement a host of FCPA related compliance enhancements.

Yet pursuant to the proposed settlement agreement, for its innovative work (that is my term), Plaintiffs’ counsel in the derivative action will seek approval of its fees and expenses not to exceed $7 million and Halliburton will not oppose such fees and will pay them through its insurance carriers.

Likewise, Johnson & Johnson recently announced (here) a proposed settlement of a derivative claim concerning a variety of misconduct, including the conduct giving rise to its 2011 FCPA enforcement action. As detailed in this prior post, pursuant to the settlement via a DPA, the company is already subject to enhanced compliance obligations related to the FCPA. The prior post noted that such enhanced compliance obligations were unusual and surprising given the DOJ’s conclusion that J&J already generally had “effective” policies and procedures. In the words of the DOJ “J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”

Yet, along comes the Plaintiffs’ firms with a derivative action and pursuant to the settlement, J&J has agreed to reimburse Plaintiffs’ counsel in an amount not exceeding $10 million and to pay approximately $450,000 in its expenses.

Like many things in this new era of FCPA enforcement, FCPA-civil related suits have, in many cases, spiraled out of control. Yet with many, including now Plaintiffs firms, with a vested financial interest in seeing the status quo prevail, it is doubtful any meaningful change is on the horizon.

Yet the question can be asked, do FCPA civil-related suits accomplish anything? Do such suits serve a purpose or are they parasitic? Is this another reason why the “facade” of FCPA enforcement matters.

Last month, Johnson & Johnson (J&J) settled an FCPA enforcement action focused on voluntary disclosed conduct in Greece, Poland, Romania involving various health care providers. See here for the prior post. [The enforcement action also involved conduct in connection with the U.N. Oil for Food Program in Iraq - conduct that was not voluntarily disclosed].

The enforcement action was resolved via a deferred prosecution agreement (DPA) and in the DPA (here) the DOJ specifically states as follows: “J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.” (emphasis added).

The J&J enforcement action is thus a rare instance of the DOJ finding a company’s pre-existing compliance and ethics program “effective” notwithstanding the fact that conduct allegedly violating the FCPA took place within the overall organization.

The J&J DPA contains the standard compliance metrics found in typical DPAs and non-prosecution agreements (Attachment C of the J&J DPA) that the company must abide by during the three year term of the DPA.

However, the DPA also contains (see Attachment D) “Enhanced Compliance Obligations” that J&J must abide by during the term of the DPA. These “enhanced compliance obligations” are unusual and surprising given the DOJ’s conclusion that J&J already generally had “effective” policies and procedures.

Even though the DPA states that J&J, as part of the voluntary disclosure and cooperation process, “conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and [...] reported on any area of concerns to the Department and the SEC,” the “enhanced compliance obligations” nevertheless require J&J to “conduct risk assessments of markets where J&J has government customers and/or other anticorruption compliance risks on a staggered, periodic basis.”

In what seems like a “full employment act” for some, the DPA requires J&J to “identify no less than five operating companies that are high risk for corruption because of their sector and location and [...] conduct FCPA Audits of those operating companies at least once every three years.” According to the DPA, “FCPA Audits of other operating companies that pose corruption risk shall occur no less than once every five years.”

Pursuant to the DPA, “each FCPA Audit shall include” the following.

“a. On-site visits by an audit team comprised of qualified auditors who have received FCPA and anticorruption training;

b. Where appropriate, participation in the on-site visits by personnel from the compliance and legal functions;

c. Review of a statistically representative sample appropriately adjusted for the risks of the market, of contracts with and payments to individual health care providers;

d. Creation of action plans resulting from issues identified during audits; these action plans will be shared with appropriate senior management, including the Chief Compliance Officer, and will contain mandatory undertakings designed to enhance anticorruption compliance, repair process weaknesses, and deter violations; and

e. Where appropriate, feasible, and permissible under local law, review of the books and records of distributors which, in the view of the audit team, may present corruption risk.”

Such “enhanced compliance obligations” seem wholly inappropriate given the DOJ’s conclusion that J&J already had “effective” compliance policies and procedures and given that J&J, prior to resolving the enforcement action, already “conducted an extensive, global review of all of its operations to determine if there were problems elsewhere…”.

Remediation and effective compliance policies and procedures are good.

But if the “enhanced compliance obligations” found in the J&J DPA are a new norm, how long will corporate defendants tolerate being required by the government (under the risk of prosecution for failure to do so) to engage in fishing expeditions (when the company already went fishing) just for the sake of going fishing again?

As have been widely reported (see here for the New York Times article), an FCPA sweep of the pharmaceutical / medical device industry is currently underway. Merck, Medtronic, Zimmer and several other companies are reportedly under investigation.

For instance, last week Eli Lilly disclosed (here) that it is “in advanced discussions with the SEC to resolve their investigation” that began in August 2003 as to “compliance by Polish subsidiaries of certain pharmaceutical companies, including Lilly, with the [FCPA].”

AstraZeneca disclosed (here) last week as follows. “As previously disclosed, AstraZeneca has received inquiries from the US Department of Justice and the Securities and Exchange Commission in connection with an investigation into Foreign Corrupt Practices Act issues in the pharmaceutical industry across several countries. AstraZeneca is cooperating with these inquiries and is investigating, among other things, sales practices, internal controls, certain distributors, and interactions with healthcare providers, institutions, and other government officials. AstraZeneca is investigating inappropriate conduct in certain countries, including China.”

Johnson & Johnson, previously included in the group of companies under investigation, resolved an FCPA enforcement action last month (see here for the prior post).

Many have suggested that J&J’s voluntarily disclosed conduct served as the point of entry for the industry wide sweep based on this sentence from the J&J deferred prosecution agreement – “J&J has cooperated and agreed to continue to cooperate with the Department in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets.”

Two issues likely to be found in such future FCPA enforcement actions are discussed below.

42 USC 1320a-7(a)

The J&J deferred prosecution agreement states – for why the DOJ agreed to resolve the case the way it did – as follows. “Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participating in federal health care programs pursuant to 42 U.S.C. 1320a-7(a).” (See here for those provisions).

This component of the J&J enforcement is nothing new – as many companies such as Siemens, BAE and others – have escaped the most serious consequences of the alleged criminal conduct because of “who” the companies were (i.e. the products sold and to whom).

This feature of FCPA enforcement is controversial (for additional reading – see here for my Q&A exchange with former Senator Arlen Specter and here for the recent article titled “FCPA Sanctions: To Big to Debar”).

In recent months, the DOJ has pledged allegiance to the OECD Convention on Bribery to defend certain of its sentencing and “foreign official” enforcement positions (see here for instance).

Does the OECD Convention say anything about enforcement agencies looking at the unique aspects of an alleged violator and then crafting a resolution to fit that alleged violator?

Yes it does.

Article 5 of the OECD Convention (here), under the heading “Enforcement,” states that investigation and prosecution of bribery offenses “shall not be influenced by considerations of national economic interest, the potential effect upon relations with another State or the identity of the natural or legal persons involved.”

Health-Care Providers as “Foreign Officials”

As noted in the prior J&J post (here) the principal FCPA enforcement theory at issue in the pharmaceutical / medical device industry sweep would seem to be the notion that [insert country] had a national healthcare system wherein most [insert country] hospitals are publicly owned and operated and thus health care providers who work at publicly-owned hospitals are government employees providing health care services in their official capacities. According to the DOJ, the individuals are therefore “foreign officials” “as that term is defined in the FCPA.”

Against this backdrop, it is interesting to observe that in the United States approximately 20% of hospitals are owned by state or local governments (see here). In addition, approximately 150 more medical centers are run by the Veterans Health Administration (see here).

Are we calling 20+% of U.S. health-care providers U.S. officials? If not, why not and why the difference?

That was quite the 72-hour period for FCPA enforcement last week. On Wednesday, it was JGC Corporation of Japan ($218.8 million in criminal fines). On Thursday, it was Comverse Technologies ($2.8 million in combined DOJ and SEC fines, penalties, and disgorgement). On Friday, it was Johnson & Johnson ($70 million in combined DOJ and SEC fines, penalties and disgorgement – plus approximately $7.9 million in a related U.K. Serious Fraud Office civil recovery).

Johnson & Johnson (“J&J), a global pharmaceutical, consumer product, and medical device company, resolved enforcement actions focused on business conduct in Greece, Poland, Romania. The enforcement actions also resolved an investigation of Johnson & Johnson subsidiary companies in the United Nations Oil for Food Program in Iraq.

The J&J enforcement action involved both a DOJ and SEC component. Total settlement amount was $70 million ($21.4 million criminal fine via a DOJ deferred prosecution agreement; $48.6 million in disgorgement and prejudgment interest via a SEC settled complaint).

The background section of the information begins as follows. “Greece has a national healthcare system wherein most Greek hospitals are publicly owned and operated. Health care providers who work at publicly-owned hospitals (“HCPs”) are government employees, providing health care services in their official capacities. Therefore, such HCPs in Greece are “foreign officials” as that term is defined in the FCPA.”

The conduct at issue focuses on Depuy International. In 1998, J&J acquired DePuy, including its subsidiary Deputy International (a U.K. company).

According to the information, between 1998 through 2006, DePuy and others conspired to “secure lucrative business with hospitals in the Greek public health care system by making and promising to make corrupt payments of money and things of value to publicly-employed Greek HCPs.”

The information alleges that “DePuy, its executives, employees, and subsidiaries agreed to sell products to Company X [an agent and distributor for DePuy and its subsidiaries in Greece until 2001 when it was acquired by DePuy and named DePuy Medec and later renamed DePuy Hellas] at a 35% discount, then paid 35% of sales by Company X to an off-shore account of Company Y [based in the Isle of Man and a consultant for DePuy International in Greece until 1999] in order to provide off-the-books funds to Agent A [a Greek national who was the beneficial owners of both Company X and Y] for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that “DePuy, its executives, employees, and subsidiaries agreed to pay Agent A and Agent B [a Greek national who acted as a consultant to DePuy International and DePuy Hellas] a percentage of the value of sales of DePuy products in Greece in order to provide funds to Agent A and Agent B for the payment of cash incentives and other things of value to publicly-employed Greek HCPs to induce the purchase of DePuy products, while concealing the payments.”

The information further alleges that between 2002 and 2006 “approximately £500,000 was withdrawn by DePuy Hellas MD [a Greek National who was an employee of Company X until it was acquired by J&J when she became the Managing Director of DePuy Hellas] and others and used to cover payments owed to HCPs by the agents but not yet paid.”

The information charges as follows. “In total, from 1998 to 2006, defendant DePuy, DePuy International, and their related subsidiaries and employees, authorized the payment, directly or indirectly, of approximately $16.4 million in cash incentives to publicly-employed Greek HCPs to induce the purchase of DePuy products. In order to conceal the payments, DePuy Hellas and DePuy International falsely recorded the payments in their books and records as “commissions.””

As to a U.S. nexus, the information describes the following: certain phone calls made to Executive B (a U.S. citizen and officer and senior executive of DePuy) in Indiana to discuss the Company X acquisition and due diligence on Greek Agent A; e-mails sent to Executive B in Indiana regarding Agent A or Greek business in general; e-mails Executive A (a British citizen who was an officer and senior executive in charge of DePuy at the time it was purchased by J&J and who retained that position until 1999 when he became a senior executive at J&J retaining control of DePuy and its related operating companies) sent or received in New Jersey regarding Agent A.

Based on the above allegations, the information charges: (i) a conspiracy to violate the FCPA’s anti-bribery and books and records provisions; and (ii) a substantive FCPA anti-bribery violation.

DPA

The DOJ’s charges against DePuy were resolved via a deferred prosecution agreement (dated January 14, 2011) between the DOJ and J&J, its subsidiaries, and its operating companies “relating to illegal conduct committed by certain J&J operating companies and subsidiaries.” In addition to DePuy Inc., other operating companies named are Cilag AG International and Janssen Pharmaceutica N.V.

Pursuant to the DPA, J&J admitted, accepted and acknowledged “that it is responsible for the acts of its officers, employees, and agents, and wholly-owned subsidiaries and operating companies” as set forth in a Statement of Facts attached to the DPA.

The term of the DPA is three years and it states that the DOJ entered into the agreement based on the following factors.

(a) J&J voluntarily and timely disclosed the majority of the misconduct described in the Information and Statement of Facts [Note - the Iraq Oil for Food conduct was not voluntarily disclosed];

(b) J&J conducted a thorough internal investigation of that misconduct;

(c) J&J reported all of its findings to the Department;

(d) J&J cooperated fully with the Department’s investigation of this matter;

(f) J&J has agreed to continue to cooperate with the Department in any investigation of the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to violations of the FCPA and related statutes;

(g) J&J has cooperated and agreed to continue to cooperate with the SEC and, at the direction of the Department, foreign authorities investigating the conduct of J&J and its directors, officers, employees, agents, consultants, subsidiaries, contractors, and subcontractors relating to corrupt payments;

(h) J&J has cooperated and agreed to continue to cooperate with theDepartment in the Department’s investigations of other companies and individuals in connection with business practices overseas in various markets;

“(i) J&J has also agreed to resolve related cases being investigated by the SEC and the United Kingdom Serious Fraud Office (the “SFO”); and

(j) Were the Department to initiate a prosecution of J&J or one of its operating companies and obtain a conviction, instead of entering into this Agreement to defer prosecution, J&J could be subject to exclusion from participation in federal health care programs pursuant to 42 U.S.C. § 1320a-7(a).

With respect to the corporate compliance reporting obligations imposed on J&J by the DPA, the agreement states as follows.

(i) J&J has already engaged in significant remediation of the misconduct described in the Statement of Facts and reviewed and improved its compliance program and implementation thereof;

(ii) J&J conducted an extensive, global review of all of its operations to determine if there were problems elsewhere and has reported on any areas of concerns to the Department and the SEC;

(iii) J&J has and will undertake enhanced compliance obligationsdescribed in [the DPA];

(iv) J&J’s cooperation during this investigation and its substantial assistance in investigations of others has been extraordinary; and

(v) J&J had a pre-existing compliance and ethics program that was effective and the majority of problematic operations globally resulted from insufficient implementation of the J&J compliance and ethics program in acquired companies.”

As stated in the DPA, the fine range for the above described conduct under the U.S. Sentencing Guidelines was $28.5 million to $57 million. Pursuant to the DPA, J&J agreed to pay a monetary penalty of $21.4 million (25% below the minimum amount suggested by the guidelines). The DPA states as follows. “J&J and the Department agree that this fine is appropriate given J&J’s voluntary and thorough disclosure of the misconduct at issue, the nature and extent of J&J’s cooperation in this matter, penalties related to the same conduct in the United Kingdom and Greece, J&J’s cooperation in the Department’s investigation of other companies, and J&J’s extraordinary remediation.”

Pursuant to the DPA, J&J agreed to self-report to the DOJ “periodically, at no less than six-month intervals” during the term of the DPA “regarding remediation and implementation of the compliance measures” described in the DPA.

As is standard in FCPA DPAs, J&J agreed not to make any public statement “contradicting the acceptance of responsibility” by J&J as set forth in the DPA.

The Statement of Facts attached to the DPA include, in addition to the Greece conduct described above, conduct relating to Poland, Romania and in connection with the U.N. Oil for Food Program in Iraq.

Poland

As to Poland, the DPA states, in summary fashion as follows.

“Poland has a national healthcare system. Most Polish hospitals are owned and operated by the government and most Polish HCPs [health care providers] are government employees providing health care services in their official capacities. Therefore, most HCPs in Poland are “foreign officials” as defined by the FCPA.”

“Polish hospitals purchase their medical products through a tender process, whereby suppliers of medical products compete for business by submitting bids to tender committees. Each tender committee may be associated with one or more hospitals.”

“In general, the tender committees evaluate the competitive bids and select the winning supplier for each purchase. Because most Polish hospitals are government owned, the tender committees effectively determine, on behalf of the government, from whom the government will purchase medical products.”

“J&J Poland [a wholly owned subsidiary of J&J] made payments and provided things of value to publicly-employed Polish HCPs, in the form of “civil contracts,” travel sponsorships, and donations of cash and equipment, to corruptly influence the decisions of HCPs on tender committees to purchase medical products from J&J Poland.”

As to civil contracts, the DPA states as follows.

“J&J Poland engaged in professional services contracts with publicly-employed Polish HCPs, known as “civil contracts.” The contracts were purportedly for professional services including lecturing, leading workshops, and conducting clinical trials.”

“J&J Poland did not require that its sales representatives provide proof that the work, for which payment had been made, was actually ever performed.”

“From January 2000 until June 2006, J&J Poland awarded civil contracts to publicly-employed Polish HCPs to corruptly influence them, in their official capacities as members of tender committees, in order to induce those HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to travel, the DPA states as follows.

“J&J Poland sponsored some publicly-employed Polish HCPs to attend conferences in order to corruptly influence them, in their official capacities as members of tender committees, in order to induce the HCPs to select, or favorably influence the selection of, J&J Poland as the winning supplier in tender processes.”

As to “Total Improper Payments in Poland,” the DPA states as follows.

“In total, from in or around 2000 to in or around 2007, J&J Poland and its employees authorized the payment, directly or indirectly, of approximately $775,000 in improper payments, including direct payments and travel, to publicly-employed Polish HCPs to induce the purchase of J&J products.”

Romania

As to Romania, the DPA states as follows.

“The national healthcare system in Romania is almost entirely state-run. The healthcare system is funded by the National Health Care Insurance Fund (“CNAS”), to which employers and employees make mandatory contributions. Most Romanian hospitals are owned and operated by the government and most HCPs in Romania are government employees. Therefore, most HCPs in Romania are “foreign officials” as defined by the FCPA.”

“From in or around 2005 through in or around 2008, J&J Romania [a wholly owned subsidary] employees made arrangements with J&J Romania distributors for the distributors, on behalf of J&J Romania, to provide cash payments and gifts to publicly-employed Romanian HCPs in exchange for prescribing certain pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

As to “Total Improper Payments in Romania,” the DPA states as follows.

“In total, from in or around July 2005 to in or around mid-2008, J&J Romania and its employees authorized the payment, directly or indirectly, of approximately $140,000 in incentives to publicly-employed Romanian HCPs to induce the purchase of pharmaceuticals manufactured by J&J subsidiaries and operating companies.”

Oil for Food Program

As to the U.N. Oil for Food Program, the DPA states as follows.

“Between in or around December 2000 and in or around March 2003, Janssen [a wholly-owned subsidiary of J&J headquarted in Belgium] and Cilag [a wholly-owned subsidiary of J&J headquartered in Switzerland] were awarded 18 contracts for the sale of pharmaceuticals to the Iraqi Ministry of Health State Company for Marketing Drugs and Medical Appliances (“Kimadia”) under the [Oil for Food Program], with a total contract value of approximately $9.9 million, which generated approximately $6.1 million in profits. Janssen and Cilag secured these contracts through the payment of approximately $857,387 in kickbacks to the government of Iraq.”

“The kickbacks were paid to the government of Iraq through JC-Lebanon Agent [a Lebanese citizen who was an agent for both Janssen and Cilag in Iraq]. The kickbacks were concealed from the United Nations by inflating Janssen and Cilag’s contract prices by 10%.”

The DPA concludes with a section titled “Books and Records” that states as follows.

“In order to conceal the payments to the Greek, Polish, and Romanian HCPs on the books and records of J&J and its subsidiaries, the payments were misrepresented as, among other things, “commissions,” “civil contracts,” “travel,” “donations,” and “discounts.””

“In order to conceal the kickback payments made to the Iraqi government through JC-Lebanon Agent for contracts under the OFFP on the books and records of Janssen and Cilag, the payments were misrepresented as “commissions.””

“At the end of J&J’s fiscal year from in or around 1998 to in or around 2007, the books and records of DePuy International, DePuy Hellas, J&J Poland, J&J Romania, Janssen, and Cilag, including those containing false characterizations of kickback and bribe payments given to the Iraqi government and Greek, Polish, and Romanian officials, were incorporated into the books and records of J&J for purposes of preparing J&J’s year-end financial statements, which were filed with the Securities and Exchange Commission.”

“Johnson & Johnson has admitted that its subsidiaries, employees and agents paid bribes to publicly-employed health care providers in Greece, Poland and Romania, and that kickbacks were paid on behalf of Johnson & Johnson subsidiary companies to the former government of Iraq under the United Nations Oil for Food program. Johnson & Johnson, however, has also cooperated extensively with the government and, as a result, has played an important role in identifying improper practices in the life sciences industry. As [the DPA] reflects, we are committed to holding corporations accountable for bribing foreign officials while, at the same time, giving meaningful credit to companies that self-report and cooperate with our investigations.” “The agreement recognizes J&J’s timely voluntary disclosure, and thorough and wide-reaching self-investigation of the underlying conduct; the extraordinary cooperation provided by the company to the department, the SEC and multiple foreign enforcement authorities, including significant assistance in the industry-wide investigation; and the extensive remedial efforts and compliance improvements undertaken by the company. In addition, J&J received a reduction in its criminal fine as a result of its cooperation in the ongoing investigation of other companies and individuals, as outlined in the U.S. Sentencing Guidelines. J&J’s fine was also reduced in light of its anticipated resolution in the United Kingdom. Due to J&J’s pre-existing compliance and ethics programs, extensive remediation, and improvement of its compliance systems and internal controls, as well as the enhanced compliance undertakings included in the agreement, J&J was not required to retain a corporate monitor, but it must report to the department on implementation of its remediation and enhanced compliance efforts every six months for the duration of the agreement.”

SEC

The SEC’s civil complaint (here) is based on the same core set of facts contained in the above DPA and alleges, in summary, as follows.

“This matter concerns violations of the Foreign Conupt Practices Act by J&J as a result of the acts of its subsidiaries to obtain business for J&J’s medical device and pharmaceutical segments.”

“Since at least 1998 and continuing to early 2006, J&J’s subsidiaries, employees and agents paid bribes to public doctors in Greece who selected J&J surgical implants for their patients. Further, J&J’s subsidiaries and agents paid bribes to doctorsand public hospital administrators in Poland who awarded tenders to J&J from 2000 to 2006. J&J’s subsidiaries and agents also paid bribes to public doctors in Romania to prescribe J&J pharmaceutical products from 2002 to 2007. Finally, J&J’s subsidiaries and agent paid kickbacks to Iraq in order to obtain contracts under the United Nations Oil for Food Program (“Program”) from 2000 to 2003.”

As to Greece, the SEC complaint alleges as follows.

“One of J&J’s product lines is surgical implants such as artificial knees, hips and other products that surgeons implant into patients. Surgical implants are a lucrative, but competitive business. In many countries, orthopedic surgeons control which implants they use.”

“In 1998, J&J acquired another medical device company, DePuy Inc., a NYSE company. A top DePuy executive then went on to become a top J&J executive in the United States in J&J’s medical device and diagnostics business (“Executive A”). At the time of the acquisition, DePuy was engaged in a widespread bribery scheme in Greece to sell its implants. Executive A and DPI executives knowingly continued that scheme. From 1998 to 2006, J&J earned $24,258,072 in profits on sales obtained through bribery.”

The SEC complaint alleges that “J&J’s internal audit group discovered the payments to Greek doctors in early 2006 after receiving a whistleblower complaint.” According to the complaint, “the issue of payments to surgeons had been previously raised in an anonymous 2003 letter to a different internal audit team concerning a related J&J subsidiary in Greece … however, that team concentrated their investigation on allegations about a possible conflict ofinterest by local management and J&J did not fully investigate the alleged payments to doctors.”

As to Poland, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and hospital administrators to obtain business. [Subsidiary] executives running three business lines oversaw the creation of sham contracts and travel documents and also the creation of slush funds as a means to funnel bribe payments to doctors andadministrators. From 2000 to 2006, J&J earned $4,348,000 in profit from its sales through the bribery.”

“The bribery appears to have stopped when Polish prosecutors began to investigate payments to doctors.”

As to travel issues, the SEC complaint alleges as follows.

“[Subsidiary] also paid for public doctors and hospital administrators to travel to medical conventions in Poland and abroad in order to influence tender committee decisions in their favor. Sponsored doctors were taken on trips in exchange for influencing the doctors’ decisions to purchase J&J’s medical products or to award hospital tenders to J&J. Some of the trips were to the United States for conferences. Some of the trips were to tourists areas in Europe, and some included spouses and family members to what amounted to vacations.”

As to Romania, the SEC complaint alleges as follows.

“Employees of … a J&J subsidiary, bribed publicly-employed doctors and pharmacists to prescribe J&J products that the company was actively promoting. The employees worked with [the subsidiary's] local distributors to deliver cash to publicly-employed doctors who ordered J&J drugs for their patients. [The subsidiary] also provided travel to certain doctors who agreed to prescribe J&J products. From 2000 to 2007, J&J earned $3,515,500 in profit from its sales through the bribery.”

As to Iraq Oil for Food conduct, the SEC complaint alleges as follows.

“J&J participated in the Program through two of its subsidiaries, Cilag AG International and Janssen Pharmaceutica N.V. (collectively “Janssen-Cilag”). During the program, Janssen-Cilag sold pharmaceuticals to an arm of the Iraqi Ministry of Health known as Kimadia. Janssen-Cilag conducted business with Kimadia in Iraq through a Lebanese agent (the “Agent”). The Agent’s primary contact with the J&J companies was an area director at Janssen-Cilag’s office in Lebanon.”

“In total, secret kickback payments of approximately $857,387 were made in connection with nineteen Oil for Food contracts. The payments were made through the Agent to Iraqi controlled accounts in order to avoid detection by the U.N. The fee was effectively a bribe paid to the Iraqi regime, which were disguised on J&J’s books and records by mischaracterizing the bribes as legitimate commissions.”

“In order to generate funds to pay the bribes and to conceal those payments, Janssen-Cilag and its agent inflated the price of the contracts by at least ten percent before submitting them to the U.N. for approval. J&J’s total profits on the contracts were $6,106,255.”

Under the heading “Anti-Bribery Violations” the complaint alleges as follows.

“J&J, through its subsidiaries and agents, knowingly allowed its employees and third parties to pay Greek and Polish public doctors and public hospital administrators for the purpose of obtaining or retaining business.”

“Executive A, a U.S. resident and a senior executive at J&J, approved the arrangements with the Greek Agent in Greece. Executive A and DPI executives knew that the Greek Agent was bribing Greek doctors. In addition, Polish doctors were bribed to use J&J products in return for trips. Use of the mails and interstate commerce was also used to facilitate the bribery schemes in both Greece and Poland.”

Under the hearing “Failure to Maintain Its Books and Records” the complaint alleges as follows.

“J&J’s subsidiaries made numerous illicit payments for the purpose of obtaining contracts in Iraq, Romania, Greece, and Poland. J&J’s books and records did not reflect the true nature of those payments. For example, they did not record that a portion of its payments to the Greek and Iraqi agents constituted reimbursements for bribes, and they did not record the true terms of the civil contract payments to Polish doctors. Efforts were made to obscure the purpose of trips to the United States and abroad. Certain J&J subsidiaries created false contracts, invoices, and other documents to conceal the true business arrangement it had with its consultants and distributors to pay bribes. False travel documents were created, and petty cash was used to pay bribes. United Nations contracts were also falsified.”

Under the heading “Failure to Maintain Adequate Internal Controls,” the complaint alleges as follows.

“J&J failed to implement internal controls to detect or prevent bribery. The conduct was widespread in various markets, Greece, Poland, Romania, and Iraq. The conduct involved employees and managers of all levels. False documents were routinely created to conceal the bribery in each country.”

“Rather than cease the bribery that was happening at DePuy prior to J&J’s acquisition, J&J through its subsidiaries, employees and agents allowed the bribery to continue. They created sham businesses and entered into contracts that were merelyconduits to allow the bribery to flourish. They failed to conduct due diligence on the Greek Distributor. The Company also paid its consultant outside of Greece to avoid detection of bribery. The Company had two different J&J corporate entities makepayments to the Greek Agent to conceal the amount of money that was being funneled todoctors as bribes.”

“[Polish subsidiary] entered into fake civil contracts with Polish doctors and J&J also created false travel arrangements in Poland and Romania to create slush funds.”

“Cilag and Janssen paid bribes to Iraq despite the fact that trade sanctions were in place against doing business in Iraq. Cilag and Janssen falsified their contracts with the United Nations to conceal the kickbacks being paid to Iraq.”

Based on the above allegations, the SEC charged J&J with FCPA anti-bribery violations and FCPA books and records and internal control violations.

Without admitting or denying the SEC’s allegations, J&J agreed to an injunction prohibiting future FCPA violations and agreed to pay $38,227,826 in disgorgement and $10,438,490 in prejudgment interest.

The SEC’s release (here) contains the following statement from Robert Kuzami (Director of the SEC’s Division of Enforcement): “The message in this and the SEC’s other FCPA cases is plain – any competitive advantage gained through corruption is a mirage. J&J chose profit margins over compliance with the law by acquiring a private company for the purpose of paying bribes, and using sham contracts, off-shore companies, and slush funds to cover its tracks.” In the release, Cheryl Scarboro (Chief of the SEC Enforcement Divisions FCPA Unit) stated as follows. “Bribes to public doctors can have a detrimental effect on the public health care systems that potentially pay more for products procured through greed and corruption.”

The SEC release states as follows.

“J&J voluntarily disclosed some of the violations by its employees and conducted a thorough internal investigation to determine the scope of the bribery and other violations, including proactive investigations in more than a dozen countries by both its internal auditors and outside counsel. J&J’s internal investigation and its ongoing compliance programs were essential in gathering facts regarding the full extent of J&J’s FCPA violations.”

SFO

On the same day as the above U.S. enforcement actions, the U.K. SFO announced (here) a Civil Recovery Order against DePuy International Limited “in which DePuy International Limited will pay £4.829 million [approximately $7.9 million], plus prosecution costs, in recognition of unlawful conduct relating to the sale of orthopaedic products in Greece between 1998 and 2006.”

According to the SFO release, the SFO “launched an investigation into the activities of DePuy International Limited in October 2007 following a referral from the DOJ.” Richard Alderman, Director of the SFO, stated as follows. “When Johnson & Johnson reported the DePuy corruption, the DOJ informed the SFO of issues within our jurisdiction. We worked with the DOJ to find a solution that served both the interests of justice and the company’s desire to put illegal activity behind it and move on. I believe the order approved [...] will illustrate to other companies how the SFO works closely with organisations across the world in enforcing the highest ethical standards, but is willing to engage and listen to companies that come to us with problems and help them find solutions.”

The SFO release further states as follows. “On the facts of this case, criminal sanction of the Greek conduct has been achieved by the conclusion of a Deferred Prosecution Agreement with DePuy International Limited’s parent company and the DOJ. The Director of the Serious Fraud Office has concluded that a prosecution was therefore prevented in this jurisdiction by the principles of double jeopardy. The underlying purpose of the rule against double jeopardy is to stop a defendant from being prosecuted twice for the same offence in different jurisdictions. The DOJ Deferred Prosecution Agreement has the legal character of a formally concluded prosecution and punishes the same conduct in Greece that had formed the basis of the Serious Fraud Office investigation. [...] Consequently the Serious Fraud office is satisfied that the most appropriate sanction is a Civil Recovery Order, under the Proceeds of Crime Act 2002.”

As highlighted in this prior post, in April 2010, former DePuy executive Robert Dougall pleaded guilty to conspiring with others “to make corrupt payments and/or give other inducements” to “medical professionals within the Greek state health care system” contrary to Section 1 of the UK Prevention of Corruption Act of 1906.

J&J’s press release (here) notes as follows. “In 2007, Johnson & Johnson voluntarily disclosed to the DOJ and the SEC that subsidiaries outside the United States were believed to have made improper payments in connection with the sale of medical devices. In the course of comprehensive compliance efforts and reports into the Company, similar issues in additional markets and businesses were identified and brought to the attention of the agencies.” William Weldon, Chairman and Chief Executive Officer of J&J stated as follows. “More than four years ago, we went to the government to report improper payments and have taken full responsibility for these actions. We are deeply disappointed by the unacceptable conduct that led to these violations. We have undertaken significant changes since then to improve our compliance efforts, and we are committed to doing everything we can to ensure this does not occur again. I know that these actions are not representative of Johnson & Johnson employees around the world who do what is honest and right every day, in the conduct of our business and in service to patients and customers worldwide. We will continue to demonstrate that Johnson & Johnson is a company that embraces responsible corporate behavior.”

Last December, I noticed this piece which discussed the increase in FCPA enforcement. One reason, according to the authors (including a former assistant director of the Division Enforcement of the SEC) – “governments will keep pursuing corrupt business practices for one very simple reason–it’s lucrative.”

Interesting point isn’t it?

If one were to calculate the “rate of return” / “return on investment” in a typical Foreign Corrupt Practices Act enforcement action it would be enormous. Most FCPA enforcement actions result from corporate voluntary disclosures whereby company counsel deliver to the prosecutors three-ring binders of the relevant documents and witness interview memos from the internal investigation and otherwise cooperate. Thus, it does not take much in terms of government resources to prosecute a typical FCPA enforcement action which typically leads to multi-million dollar fines and penalties.

Where does this money go?

Straight to the U.S. treasury.

Say what you want about the SFO’s BAE enforcement action, but at least a portion of that money went to the alleged “victims” of the wrongful conduct prosecuted – the people of Tanzania. (See here).

The suggestion that one of the reasons for the rise in FCPA enforcement is because it is a lucrative cash cow for the government would seem not to be dispelled by comments made this week in an American Lawyer article “Here Comes the Payoff Police” (here) by a former high-ranking DOJ FCPA official. The comment that caught my attention is this:

“The government sees a profitable program, and it’s going to ride that horse until it can’t ride it anymore.”

Add to the list Pfizer and Johnson & Johnson. See here for the Main Justice piece.

FCPA Unit in S.F.

As detailed here and elsewhere, the SEC’s San Francisco branch office has a new unit devoted exclusively to the FCPA. “The fact that we have a significant presence of companies in Silicon Valley who do business internationally, specifically in Asia, makes us well-suited for addressing these kinds of issues,” said Tracy L. Davis, the assistant regional director in charge of the new San Francisco unit. “That’s one of the reasons why San Francisco is a particularly good location for an FCPA unit.”